How Stephen Schwarzman became private equity’s designated villain.

On June 18, 2007, Stephen A. Schwarzman, the chairman and chief executive of the Blackstone Group, and his driver approached the Fifth Avenue entrance of the New York Public Library. Schwarzman, a member of the library’s board, was being honored that night. To his dismay, television reporters and cameramen were milling on the steps and the sidewalk. He evaded them by using a side entrance. A TV cameraman managed to penetrate the cocktail party that preceded the ceremony, and Schwarzman was startled when the glare of a camera-mounted spotlight hit him in the face.

In the previous few weeks, he had become the designated villain of an era on Wall Street—an era of rapacious capitalists and heedless self-indulgence that had driven the Dow Jones Industrial Average to new highs, along with the prices of luxury real estate and contemporary art, while the incomes of ordinary Americans stagnated or fell. Blackstone, the partnership that Schwarzman founded, in 1985, with Peter G. Peterson, Secretary of Commerce under Richard Nixon and a former chairman and C.E.O. of Lehman Brothers, was a new type of financial institution: a manager of so-called alternative assets, such as private-equity, real-estate, and hedge funds—esoteric vehicles that barely existed when Blackstone began but now accounted for trillions in assets. Most of the investments came from corporate and public pension funds, endowments of universities and other nonprofit institutions, insurance companies, and rich people. Blackstone was the world’s largest manager of these alternative assets, with $88 billion. Its investors included Dartmouth College, Indiana University, the University of Texas, the University of Illinois, Memorial Sloan-Kettering Cancer Center, and the Ohio Public Employee Retirement System. It had taken control of a hundred and twelve companies, with a combined value of nearly $200 billion. It had just completed what was at the time the largest private-equity buyout ever, the purchase, for $39 billion, of Equity Office Properties, and was on the verge of acquiring Hilton Hotels.

Blackstone was also about to become the largest private-equity firm to offer shares to the public. A week before the library tribute, the company disclosed, as required by the Securities and Exchange Commission, that Schwarzman would receive $677.2 million in cash from the public offering and that he would retain shares worth an estimated $7.8 billion, making him one of the richest men in the country. Coming soon after the lavish and widely chronicled sixtieth-birthday party that Schwarzman had given himself in February, an unflattering profile on the front page of the Wall Street Journal, and strident calls from Congress to raise taxes on private-equity funds like Blackstone’s, the disclosures could only tarnish the public offering.

Nevertheless, investors were eager to buy shares. On June 21st, a heavily oversubscribed public offering was priced at thirty-one dollars a share, at the top of the projected range, causing Blackstone to be valued at $31 billion—not far behind the venerable Lehman Brothers. The next day, Blackstone shares, trading under the symbol BX, opened at $36.45 and closed slightly lower, at $35.06. Schwarzman’s friend James B. (Jimmy) Lee, Jr., a vice-chairman at J. P. Morgan Chase, sent him a congratulatory e-mail:

You were like Indiana Jones over the last few weeks. . . . They rolled giant boulders at you . . . fired poison darts at you . . . threw you into that giant snake pit . . . and yet you still found the grail, and got the blonde. . . . Bravo.

Schwarzman had demonstrated extraordinary timing. Just days before, two Bear Stearns hedge funds holding mortgage-backed securities collapsed—the first tremors of what became a full-blown credit crisis. By the end of the year, major financial institutions had recorded losses on mortgages and related financial instruments of more than a hundred billion dollars. The chiefs of Merrill Lynch and Citigroup lost their jobs. Citigroup, Merrill, Bear Stearns, Morgan Stanley, and UBS turned in near-desperation to sovereign wealth funds (funds held by governments) and rich investors in the Middle East and Asia for capital infusions.

In this chaotic environment, Blackstone had managed to avoid nearly all the pitfalls of subprime mortgages and mortgage-backed securities. It specializes in commercial, not residential, real estate. Indeed, its hedge funds are designed to profit from market turmoil, and the enormous assets that it manages deliver steady fees in good markets and bad. The stock peaked on its first day of trading, however; by mid-January, its value had been cut almost in half.

Schwarzman still had his cash from the offering, which turned out to be $684 million, but his Blackstone stake, worth $8.83 billion after the first day, was worth just $4.62 billion.

Schwarzman has made himself an easy target for critics of Wall Street greed and conspicuous consumption. He lives in splendor in Manhattan, and he has an expanding collection of trophy residences that are lavish even by the current standards of Wall Street. In May, 2000, Schwarzman paid $37 million—reportedly a record sum at the time for a Manhattan co-op—for a thirty-five-room triplex on Park Avenue that was once owned by John D. Rockefeller, Jr. In 2003, he paid $20.5 million for Four Winds, the former E. F. Hutton estate in Florida, which occupies a choice spit of land between the ocean and the Intracoastal waterway. Designed by the Palm Beach architect Maurice Fatio, the thirteen-thousand-square-foot, British-colonial-style estate was a designated historic landmark; local residents were startled when Schwarzman had the house razed. The ensuing fourteen-month wrangle between Schwarzman and his New York architects and the Landmarks Preservation Commission filled countless pages of testimony. It turned out that Schwarzman had got approval for a proposed expansion, and, as the house was dismantled, workers had numbered and stored everything so that it could be rebuilt in an expanded form. In 2006, he paid $34 million for a Federal-style house, on eight acres on Mecox Bay, in the Hamptons, that was previously owned by the Vanderbilt heir Carter Burden.

Schwarzman also owns a coastal estate in Saint-Tropez and a beachfront property in Jamaica. He typically spends summer weekends and August in East Hampton; July in Saint-Tropez; and winter weekends in Palm Beach. His children use the house in Jamaica; he rarely goes there. The five properties and their renovations appear to have cost Schwarzman at least a hundred and twenty-five million dollars. “I love houses,” he told me recently. “I’m not sure why.”

Whatever his indulgences, Schwarzman has always drawn a strict line between personal expenses and Blackstone’s business operations; colleagues say that he keeps a close watch on office spending. The company’s offices, on Park Avenue, are furnished with slightly threadbare traditional rugs and furniture and a mixture of modest prints and photographs. (The offices are scheduled to be renovated later this year.) Blackstone does not own a corporate jet. Instead, it uses Schwarzman’s private jet. (In 2006, the company paid him $1.54 million for the privilege.) Schwarzman must approve any other chartered flights. Partners pay for their own lunches; there is a twenty-five-dollar limit on dinner expenses for employees working at night. Even subscriptions to the Wall Street Journal are deemed personal expenses, and all the partners pay for their own. One exception has always been company events; Blackstone has a long history of opulent anniversary and closing dinners, often at the Four Seasons, which is referred to by some as the Blackstone cafeteria. Still, until recently Schwarzman had trouble getting a prime table in the Grill Room at lunch. According to a friend of both men, when Schwarzman asked Peterson why, his co-founder replied, “It takes more than just money.”

Another traditional measure of wealth is charitable activities and donations, and Schwarzman’s philanthropic activities have received wide notice. With a hundred and fifty million dollars from the public-offering proceeds, Blackstone established the Blackstone Foundation. Schwarzman has contributed to or raised money for a long list of nonprofit institutions, including the Frick Collection, the Whitney Museum, Phoenix House, the Red Cross, the Inner-City Scholarship Fund, the American Museum of Natural History, New York City Outward Bound, the Asia Society, and the Central Park Conservancy. His competitive instincts are as keen here as in business; he told me that every fund-raiser that he has chaired or at which he has been the honoree has set a new record. He is on the board not only of the New York Public Library but of the Frick and of New York City Ballet. Jimmy Lee jokes that his friend has received more accolades and raised more money for the Catholic Archdiocese of New York than any other Jew; Edward Cardinal Egan is a close friend. (Schwarzman has also raised money for the American Jewish Committee.) As chairman of the board of trustees of the Kennedy Center, in Washington, he shares a box every year with the President and the center’s honorees.

In America, board memberships and contributions to worthy causes in the arts and education have traditionally helped cleanse a man of any taint of new money and can temper populist resentment of great wealth. For someone of Schwarzman’s wealth and business prominence, affiliations with boards—which are stocked with the lawyers, bankers, and business executives who are Blackstone’s clients, potential clients, or advisers to them—are all but essential. A board member is expected to make contributions that roughly correlate to the size of his personal fortune. In Schwarzman’s case, this aspect of the pact has generated considerable controversy and ill will, especially given his overt displays of wealth.

Schwarzman pledged ten million dollars to the Kennedy Center, but the pledge was to be fulfilled over ten years, which gave it a present value significantly lower than ten million. According to a fellow member of the library board, “He has given, but not remotely what he could. A big capital campaign is coming up. We hope that he’ll give very generously.”

One of Schwarzman’s most controversial proposed gifts was to Yale, his alma mater, which, during the late nineties, agreed to name the freshman dining commons after Schwarzman in return for $17 million. Some people at Yale thought the commitment was in hand, but it emerged that Schwarzman’s gift would actually be a contribution to one of Blackstone’s investment partnerships on Yale’s behalf. No money would change hands until the fund was liquidated, and there was a risk that the investment might be worth far less than $17 million (although there was also the possibility that it would be worth more). Yale balked at trading a significant naming opportunity for what it considered a speculative commitment, and Schwarzman did not give the money. (The naming opportunity remains.)

The president of Yale, Richard C. Levin, won’t discuss the incident other than to say, “We’re still good friends.” He points out that Schwarzman has raised money for Yale as a member of the executive committee of the current fund-raising campaign and was co-chair of the New York region during the previous one. “He’s been supportive and enthusiastic.” Yale, of course, is hoping for generosity in the future. Levin says, “Now that he’s reached a new level of liquidity, we hope that he’ll become a world-class philanthropist.”

Schwarzman’s longtime friend Jeffrey Rosen, a Yale classmate who is now a deputy chairman at Lazard, defended Schwarzman’s cautious approach. “He believes he can compound the money at a higher rate than an institution can. By reinvesting it now, he’ll have more to give away. In five years, who knows how much he could have? Steve is at the dawn of his philanthropic stage. He’ll mature into this.”

Schwarzman himself says, “I’m thinking through how I want to approach that area of philanthropy. Assuming that Blackstone does well over time, and the credit markets recover, I’ll have significant resources for charitable activities.”

Schwarzman has seemed reluctant to embrace the time-honored relationship between wealth, class, good works, and self-restraint. Richard Beattie, a prominent lawyer who is also a longtime friend, told me, “Steve laughs about the old Wasp image—he doesn’t buy into that old-money standard. He thinks it’s ridiculous.” Schwarzman may be rethinking that view, however; he says that he is pondering a major gift, one likely to silence his critics, but that it would be premature to say more.

Schwarzman’s many friends stoutly defend his right to spend or give away his wealth as he sees fit. I spoke to a number of people who attended the sixtieth-birthday party; most felt that, as one friend put it, “it’s his money, and he should be able to do what he wants with it.” He added, “Isn’t this America?”

I knew Schwarzman in the nineteen-eighties, when he was at Lehman Brothers, but I hadn’t seen him for twenty years. Late last year, we met in the Blackstone offices on several occasions. Although he has gained weight, and his dark hair is now streaked with gray, he has the same dark eyes, and he exudes a restless intensity and an enthusiasm that belies his age. Before we sat down, he showed me around his office, an ample corner space, but modest by the standards of chief executives. Half of his desk is crowded with family photographs. Behind his chair, along the windows facing Park Avenue, are scores of photographs of him with prominent people, including President Bush and Laura Bush, the German Chancellor Angela Merkel, Cardinal Egan, Michael Bloomberg, Colin Powell, President Hu Jintao of China, Bruce Wasserstein, and the 2006 honorees at the Kennedy Center—Andrew Lloyd Webber, Zubin Mehta, Dolly Parton, Smokey Robinson, and Steven Spielberg.

As we began talking, he seemed defensive. Nearly everyone, including Peterson, had advised him to stay out of the news and to avoid reporters, but many of his friends and associates had already spoken to me, and he seemed to warm up when I asked him to recount his path from suburban Philadelphia boy to Wall Street billionaire. He has a vivid memory for details, whether it involves an anecdote from his first job on Wall Street or a troubled buyout or his first merger.

Schwarzman and his younger brothers, Mark and Warren, who are twins, grew up in the suburb of Abington; his mother still lives nearby. Schwarzman’s father came from a comfortably middle-class family of merchants in Philadelphia; his mother grew up poor, in the Bronx. Her father died when she was ten, and her mother worked to support the family. “My father was very bright,” Schwarzman says. “My mother had enormous drive. Put that together, and that’s my gene pool.”

Schwarzman attended Abington High School, where he played basketball and ran track. His height—he is five feet eight—worked against him, but he says he learned that by working and training harder than anyone else “you gain an advantage at the margin.” He ran sprints and cross-country. He likes to tell a story about how, early in one cross-country race, he slipped and broke his wrist. Determined to set a record for the course, he got up and kept running, his arm tucked against his side, and set the record. At the finish, his coach asked him what was wrong. “I broke my wrist,” Schwarzman said, then went into shock and was rushed to the hospital. In 2004, he donated a new football stadium to Abington High School—the Stephen A. Schwarzman Stadium.

Schwarzman’s father and grandfather ran a drygoods store, Schwarzmans, which sold bed and bath linens, draperies, and housewares. When Stephen was fifteen, he approached his father with a plan to open more stores and expand into a national chain, “like Sears.”

“That’s a bad idea,” his father told him. So he suggested expanding in Pennsylvania. Finally, he pleaded with him to open just one more store. All his ideas were rejected. “I’m very happy with my life as it is,” his father explained as Schwarzman kept badgering him. “I’ve got enough money to send you and your brothers to college. We’ve got a nice house and two cars. I don’t want any more in life.” Schwarzman found this incomprehensible. He turned to his mother. “That’s your father,” she said. “He’s happy!”

Schwarzman’s father retired at the age of seventy, after selling the store. It closed ten years later, the victim of mounting competition from national chains like Bed Bath & Beyond.

“I admired him,” Schwarzman said of his father. “He knew what he wanted and he achieved it. But that’s not for me. I wanted a much bigger stage. I didn’t know what it was, but I knew something had to be out there.”

When Schwarzman arrived at Yale, in 1965, he was drawn to superiors—certain professors and administrators—and to students who shared his sense of ambition and were likely to get ahead. “I’ve always been comfortable with people who run things, whether it was the principal of my high school or the president of the university,” Schwarzman told me. “I empathize with their problems, with their issues. I ask myself, How would I do that? It’s very easy if you think about what they think. It comes naturally to me.” His academic record wasn’t distinguished, and he often seemed impatient with intellectual pursuits. In his senior year, he was chosen by Skull and Bones.

The summer before his sophomore year, while recovering from a touch-football injury, Schwarzman decided to study classical music, a subject about which he knew almost nothing. He started with Gregorian chants and worked through the repertoire chronologically, listening to recordings and reading related texts. He studied every major work and every major conductor, often spending, he claims, eight to ten hours a day listening to the stereo system. By late summer, he had reached Tchaikovsky. He was especially captivated by the ballet music from “The Sleeping Beauty.” “I’d close my eyes and listen, and I could see dancing,” he recalled. Back at Yale that fall, he shared his newfound enthusiasm with the physicist Horace Taft, the master of Davenport College, where Schwarzman lived, and his wife, Mary Jane, who loved the ballet. The couple grew fond of him, and Mary Jane tutored him on the fine points of ballet and arranged trips to performances for him.

There were no dance performances on Yale’s all-male campus, but the New England women’s colleges were filled with aspiring dancers. It occurred to Schwarzman that with these women he could stage a dance performance, and charge admission. “Put attractive women in tights and you’d sell out,” he said. He got in touch with Walter Terry, the dance critic for Saturday Review, and persuaded him to attend. He scheduled the performance for a weeknight, when nothing else was competing for students’ attention. The event sold out, and Terry wrote about it in Saturday Review, in the issue of March 29, 1969. In the article, Schwarzman, asked about his future, said, “I can’t afford the arts right now. That takes money. So I’m going to a school of business administration.”

Schwarzman had majored in Intensive Culture and Behavior, an interdisciplinary subject, and hadn’t taken a single economics or accounting course. Law school or business school seemed a logical next step, but he had little sense of where either would lead. During his senior year, he had sent a letter to W. Averell Harriman, the wartime Ambassador to Russia and former governor of New York, who was serving as the President’s representative at the Paris peace talks. “There weren’t that many people in that era to admire, and I wrote him a letter saying I admired him and wanted to meet him,” Schwarzman recalled. Harriman, a fellow Skull and Bones man, invited him to lunch at his town house, on the Upper East Side, occasionally interrupting their talk to take calls from Cyrus Vance, in Paris. According to Schwarzman, Harriman asked him, “Young man, are you independently wealthy?”

“No, sir, I’m not.”

“Well, I am the son of a very rich man, which has made an enormous difference—that’s the reason you’re seeing me. If you have any interest in the political world, I advise you to become independently wealthy yourself.”

Schwarzman applied to several law and business schools. He was accepted at Harvard Business School. Feeling that he needed a break, he asked to defer his admission for a year.

To earn some extra money, Schwarzman worked for the Yale alumni office and then the admissions office. Larry Noble, a 1953 graduate who worked in the alumni office, introduced Schwarzman to others in Yale’s extensive alumni network, including his classmate Bill Donaldson, who was running an investment-banking firm, Donaldson, Lufkin & Jenrette. (Donaldson went on to become chairman and C.E.O. of the New York Stock Exchange and chairman of the S.E.C.) Schwarzman waited in the reception area for half an hour, watching as young bankers hurried past in shirtsleeves, followed by secretaries wearing short skirts and big gold earrings. “It seemed fast-moving, intense,” Schwarzman recalled. “Everyone seemed happy.” When Donaldson asked him why he wanted to work at the firm, Schwarzman replied, “Mr. Donaldson, I don’t even know what you do. But if you have such great-looking girls and intense guys then I want to do it.” Schwarzman was hired at a salary of ten thousand five hundred dollars, which, by his account, was “five hundred dollars more than anyone else in my class at Yale.” He quickly realized that he was unqualified. He left after six months, but, before leaving, he had lunch with Donaldson. “I’m sorry I didn’t make more of a contribution,” Schwarzman recalls saying. “If you don’t mind my asking, why did you hire me and waste your money?”

“It’s simple,” Donaldson replied. “One day you’ll be the head of this firm.”

“You must be kidding. Why?”

“It’s my instinct. You have something special and I want to bet on it.”

(Donaldson says that he has no recollection of such an incident, but he does recall telling Schwarzman that if he returned to the firm he would do well.)

Schwarzman met his first wife, Ellen Philips, during his second year at Harvard Business School, where she worked as a researcher and helped grade essays. She was the daughter of Jesse Philips, a wealthy Ohio industrialist. They were married in 1971 and had two children, Elizabeth, in 1976, and Edward, in 1979. Looking for a job after graduating, Schwarzman was shocked when both Goldman Sachs and First Boston turned him down, but he had offers from Lehman Brothers and Morgan Stanley. He claims that he was only the second Jew to get a job offer from Morgan Stanley, but he chose Lehman. Being at Lehman worked to his advantage. As one former Lehman banker describes the firm, “It was survival of the fittest. You produced the business and then you fought over the proceeds. It was every man for himself.” Bruce Wasserstein, then at First Boston, and soon to be regarded as the leading mergers-and-acquisitions banker on Wall Street, said to Eric Gleacher, the head of M. & A. at Lehman, and Schwarzman, “I don’t understand why all of you at Lehman Brothers hate each other. I get along with both of you.” To which Schwarzman replied, “If you were at Lehman Brothers, we’d hate you, too.”

Tropicana, an important Lehman client that was merging with Beatrice Foods, asked Schwarzman to represent the company in the sale, even though Schwarzman had never worked on a merger. (A Tropicana executive had been impressed by a bond presentation Schwarzman made, and felt that, despite his inexperience, he could explain complicated aspects of a merger to a relatively unsophisticated board.) The $488-million deal, in 1978, marked Schwarzman’s emergence as a lead banker in M. & A., a field that was growing, along with junk-bond empires and a new entrepreneurial breed, the corporate raider.

Schwarzman was too new and too young to rival M. & A. strategists like Wasserstein, but his work habits and his competitive drive impressed clients and other bankers and lawyers in that tightly knit world. A former Lehman colleague recalls a concert at Carnegie Hall that he and Schwarzman attended with their wives. As soon as the lights dimmed and the music began, Schwarzman opened his briefcase, pulled out a sheaf of papers, and began working. Though his wife chastised him at intermission, he resumed working as soon as they returned to their seats. He typically was awake by 4:30 or 5 A.M., and often worked until 10 P.M.—a habit that continues today. Schwarzman was a showman as well. Another Lehman colleague told me that once, when he and Schwarzman were to call on Harry Gray, then the acquisitive chief executive of the industrial conglomerate United Technologies, based in Hartford, they travelled to the meeting by helicopter and limousine. When the colleague asked why they didn’t simply drive or take the train, Schwarzman replied, “You have to make an impression. ‘If you want my time, I’m so valuable this is how I travel.’ ” According to Schwarzman, Gray and United Technologies became a significant Lehman Brothers client.

Schwarzman says that he consistently earned the highest bonus of anyone in his Lehman Brothers “class.” He was made a partner in 1978, just six years after arriving at the firm. In 1980, the Sunday Times ran a profile of Schwarzman, with the headline “STEPHEN SCHWARZMAN, LEHMAN’S MERGER MAKER.” In the office the next day, he was beaming and brandishing a copy. “He loved the publicity, loved the attention,” a friend recalls. At Lehman’s annual firm outing that spring, at a country club, his colleagues had a copy of the article printed on a framed mirror, so that Schwarzman’s face would be reflected whenever he read it.

In 1973, Peter G. Peterson joined Lehman as vice-chairman, and soon afterward became chairman and C.E.O. In addition to having been Nixon’s Secretary of Commerce, Peterson, a former chairman and chief executive of Bell & Howell, had headed Nixon’s Council on International Economic Policy and was a prominent member of the Council on Foreign Relations—a man very much in the postwar mold of an Averell Harriman, a John J. McCloy, or a Nelson Rockefeller, moving easily between private business and public service. He was sought after more for his contacts and his influence than for his business skills; in his work for Nixon, he had travelled incessantly and had got to know the chief executives of the world’s major businesses, often dropping their names in conversation. Peterson was a self-made man of an earlier generation, who had grown up in Kearney, Nebraska. His parents were Greek immigrants who ran a restaurant, where Peterson worked throughout his youth. He remembers people lining up at soup kitchens during the Depression and begging for food at the restaurant.

After investing much of his life savings in an equity stake in Lehman, Peterson discovered, three weeks after his arrival at the firm, that Lehman’s head trader, Lew Glucksman, had run up millions of dollars in losses, drastically depleting the firm’s capital and calling into question its ability to survive. The firm was in disarray. Recruited to help build up the roster of corporate clients, Peterson was suddenly made chief executive, mainly because, as one partner recalls, “he hadn’t been around long enough for anyone to hate him.”

Peterson’s instinct was to try to reconcile the warring factions. Urged by many to fire Glucksman, Peterson argued that Glucksman was a talented trader who had had only one bad year; instead, he named him to the management committee, and later promoted him to co-C.E.O. Peterson set up task forces to evaluate the firm’s strengths, weaknesses, and business plan, and asked Schwarzman to serve on one.

Schwarzman, who was twenty-seven, again demonstrated an extraordinary ability to ingratiate himself with an older man—Peterson was forty-seven—in a position of authority. Peterson recalls that Schwarzman was “extremely gifted, probably one of the two or three most gifted people I’ve met in the M. & A. world. More important, he had balance. He could make the major judgment calls. He knew when a C.E.O. needed to be called. He could gain their confidence better than anyone. I could bring in the business, but I couldn’t implement it. He was great at this, great to work with. He’d carry out the deal, and keep me informed.” Peterson recalls that his goal was to get to No. 2 or No. 3 in the M. & A. rankings. “I’d invite in a C.E.O.,” Peterson said. “I’d meet him, and then I’d invite Steve in for lunch. We got a lot of business this way.”

In 1983, Glucksman organized a luncheon to celebrate Peterson’s tenth anniversary at Lehman. The firm gave him a Henry Moore sketch, and Glucksman spoke enthusiastically of their relationship as co-C.E.O.s. By then, Glucksman’s trading operation was making record profits, and Peterson was credited with saving the firm. Business Week had run a cover story on the firm’s resurrection: “Back from the Brink Comes Lehman Brothers.” Five weeks later, Glucksman summoned Peterson to his office and told him that he had the votes to force him out. “I have to run the place by myself,” Glucksman insisted. Peterson asked if he could at least be given an opportunity to resign, and Glucksman refused.

Schwarzman urged Peterson to fight, insisting that they could rally enough support to block Glucksman. But Peterson saw no point in waging a civil war that might destroy the firm, and said that it was time to start something new. As part of his severance package, he insisted on generous stock options, which would be valuable if the firm was ever sold.

Peterson’s departure did not forestall civil war at Lehman Brothers, and within months the firm was losing money. Schwarzman, accurately gauging the ambitions of Peter Cohen, the chairman of American Express, to expand into the potentially lucrative field of investment banking, approached Cohen (a neighbor in East Hampton) and delivered a persuasive assessment of the benefits to American Express of buying Lehman. In 1984, just nine months after Peterson’s departure, Lehman was sold for $360 million. To many, it was Schwarzman’s most brilliant deal yet: he had enriched himself and his mentor while turning the tables on Glucksman and freeing himself to join Peterson in launching a new partnership.

Schwarzman initially refused to accompany Peterson in that new venture, because Peterson already had a partner, the investor Eli Jacobs, but Peterson and Jacobs soon quarrelled. This falling out cleared the way for Schwarzman to join Peterson, in 1985. Peterson and Schwarzman created a founders’ agreement that vested power in their hands alone, guaranteeing that one faction of partners couldn’t start a war over control of the firm. Peterson and Schwarzman had equal equity shares. Initially, they were going to call the firm Peterson & Schwarzman, with Schwarzman conceding top billing to Peterson, but Peterson argued that they needed something more institutional, or future partners would want their names added, leading to constant changes and an unwieldy name. It was Schwarzman’s idea to call it Black—schwarz, in German—stone, petros, in Greek. “I thought that was brilliant,” Peterson says.

“My job was to bring in business,” Peterson explains. He launched a direct-mail campaign, targeting a hundred chief executives, in which he declared that Blackstone would not back hostile deals and would have no conflicts of interest with investment-banking clients, since Blackstone had no investment-banking clients. According to Peterson, the effort resulted in retainer agreements with E. F. Hutton, Firestone, Union Carbide, Bristol-Myers, and Sony, whose chairman, Akio Morita, knew Peterson from his White House years. Peterson, in turn, joined the Sony board, solidifying his links with Japan.

Schwarzman and Peterson had bigger ambitions than a boutique firm: they wanted an institution with an array of businesses that could deliver a “comparative advantage,” the mantra of competition taught at Peterson’s alma mater, the University of Chicago. Schwarzman was also eager to expand into something less subject to volatile market cycles than M. & A. An obvious target was private equity, the new, sanitized name for the leveraged buyouts that had resulted in the scandals of the nineteen-eighties. Combining a merger-advisory business with a buyout fund was bold; leveraged-buyout funds were considered hostile to existing managements, and that was antithetical to Peterson’s insistence that Blackstone’s activities be strictly friendly to its corporate clients. But he and Schwarzman were convinced that a private-equity fund could be useful to established managements, too.

Shortly after they formed the company, a cautionary scandal involving Dennis Levine, who had been a Schwarzman protégé in Lehman’s M. & A. department, became public. Levine was an aggressive banker who had occupied the office next to Schwarzman’s, and who showed an uncanny ability to foresee hostile bids, which, in turn, often enabled Lehman to approach the target company to defend it. In 1986, Levine, who had left Lehman and was at Drexel Burnham Lambert, was arrested and charged with insider trading. This launched the biggest insider-trading scandal in Wall Street history. Levine agreed to coöperate with investigators, and eventually pleaded guilty to four felony counts. Among those implicated in the ensuing investigation were the arbitrager Ivan Boesky and the junk-bond financier Michael Milken. In short order came the collapse of Drexel Burnham, Milken’s firm and the principal force behind the takeover boom; the collapse of the junk-bond market; the savings-and-loan debacle, which was in part a consequence of junk bonds; and the 1990-91 recession.

According to Schwarzman, much of Levine’s insider trading had involved confidential information that he gleaned from his work at Lehman, including deals that Schwarzman had worked on. “Seldom have I felt so violated or betrayed,” Schwarzman said. “I personally talk to every class of first-year associates and analysts and tell them the story of Dennis Levine. I lecture them on what inside information is and how important it is to keep it confidential. Integrity is a core value. Dennis Levine helped drive that home for me.”

“Blackstone puts a huge emphasis on integrity,” Peterson told me. “We have a code of conduct, and every employee signs it every year. You have an affirmative responsibility to speak out about anything questionable, or unethical, you know about. If you don’t, you’re dismissed. In twenty-three years, we haven’t had one scandal.”

Despite the 1987 crash, the ensuing collapse of the junk-bond market, and the recession, the nineteen-nineties were the beginning of a golden age for private equity. As with leveraged buyouts, the power of private equity, and the wellspring of its remarkable profits, is leverage—the use of borrowed money. The private-equity fund raises capital from rich investors, often pension funds or large institutions. (The fund is “private” in that only invited investors are allowed to participate.) It uses the capital to buy an asset, typically a publicly traded company or a unit of a publicly traded company; restructures it financially to add layers of debt; manages it aggressively to cut costs and boost cash flow; then, after five to seven years, pays off the debt and resells the company or relaunches it on the public markets at an enormous profit. The power of leverage is vast: if you invest ten dollars in an asset and sell it a year later for twelve, you have earned twenty per cent. If you invest one dollar, borrow nine, pay a dollar in interest on the debt (an eleven-per-cent rate), and sell the asset for the same twelve dollars, your return is one hundred per cent.

Much as private-equity firms like to extoll the brilliance of their M.B.A.-holding partners and associates, this isn’t a difficult concept, which raises the question of why public companies don’t embrace the same high-leverage, high-profit model. The reason is that private-equity funds exist to generate capital gains, which are taxed at fifteen per cent; public companies focus on earnings, which are taxed at a much higher rate. Public companies are typically valued at a multiple of earnings, and the interest payments associated with high leverage may all but eliminate earnings. Private companies don’t report earnings. Freed from any preoccupation with quarterly earnings reports, private-equity firms like to praise their long-term perspective, but “long term” means between five and seven years, at which point they sell the asset to realize a capital gain and move on to new conquests. Most public companies are managed so as to exist in perpetuity. Even so, in recent years public companies have added huge amounts of leverage to their balance sheets, often by buying back their shares or taking on debt for acquisitions.

In addition to the turbocharging effects of leverage, private-equity operations like Blackstone benefit from an exceedingly generous compensation structure. The private-equity manager takes a management fee—two per cent is common—of the capital raised from the firm’s investors and twenty per cent of all gains (a stake known as “carried interest”), under the formula known on Wall Street as “two and twenty.” What’s left over is returned to the investors. The fees have no relation to the size or sophistication of the deal or the hours worked. Private-equity bankers reap the same twenty-per-cent carried interest on a multibillion-dollar deal as on one involving several million. A few firms have pushed higher, to twenty-five- and even to thirty-per-cent carried interest, but few have been willing to undercut the standard. Investors have tolerated the exorbitant fees, as long as they have been able to get results that surpass what they can earn in conventional stock and bond funds.

Several early Blackstone deals illustrate the firm’s strategy of combining high-leverage buyouts with M. & A. advisory work for established clients. In 1987, USX (the former U.S. Steel) was under pressure to raise its stock price in order to fend off the corporate raider Carl Icahn. To raise cash for a stock buyback, USX decided to sell its transport subsidiaries, which hauled iron ore and other raw materials into USX’s factories and finished steel out of them. It was an unglamorous, low-growth business, but it had a captive customer in USX and predictable cash flow to service debt. Peterson argued that Blackstone was friendly, whereas other bidders might prove little better than a raider, like Icahn. His argument prevailed, and USX sold the subsidiaries, for $640 million, to a company owned fifty-one per cent by Blackstone and forty-nine per cent by USX and the company’s managers. Blackstone invested just $13 million, with the rest in debt financing. USX used the cash to buy back shares, and Icahn eventually went away. According to Blackstone, the project ultimately generated a return of more than two thousand per cent.

Leverage greatly magnifies gains, but it exacerbates losses in equal measure. Recessions are especially treacherous. An early Blackstone employee, recalling 1990 and ’91, says, “These were tough years. Everyone was trying to prove themselves. The culture hadn’t jelled.” Though Schwarzman could be affable and charming—he called every partner on his or her birthday and sang “Happy Birthday”—he was impatient with failure and felt under intense pressure to prove himself. He sharply criticized employees like Steven Winograd and Brian McVeigh in front of others, forcing them out of the firm in the wake of bad deals. He clashed with Larry Fink, who departed with his money-management unit, BlackRock, which now manages more than a trillion dollars in assets. Roger Altman left to become Deputy Treasury Secretary in the Clinton Administration, and eventually started his own private-equity firm, Evercore.

Turnover among partners was relatively high. The stress and the long hours damaged Schwarzman’s marriage; he and Ellen divorced in 1990, though he remained close to his children.

In 1993, Schwarzman hired another refugee from Lehman Brothers, J. Tomilson Hill, the former co-chief executive, to run Blackstone’s fledgling offerings in the world of hedge funds, the third major prong in Blackstone’s expansion strategy. Hedge funds have been the fastest-growing financial vehicles of the past five years—there are some eight thousand—and are fuelled by the same quest for higher returns and low volatility that has driven the private-equity boom. Hedge funds got their name from investment strategies that sell stocks short, or “hedge” against a declining market, thereby generating high returns in both bull and bear markets, but they embrace many investment strategies. The only thing they have in common with private-equity partnerships is the two-and-twenty (or higher) fee structure. Only recently has Blackstone launched its own hedge funds; its focus had been on what is known as a “fund of funds” approach, meaning that it steered clients’ money into suitable hedge funds. In return, Blackstone takes a fee of one per cent of the assets. The combination of private-equity, real-estate, and hedge funds has given Blackstone a presence in all three of the major alternative-asset classes.

In 1993, Schwarzman was introduced to Christine Hearst, a glamorous forty-year-old who had recently been divorced from Austin Hearst, an heir to the Hearst fortune. Christine, an intellectual-property lawyer, grew up on Long Island, the daughter of a New York City fireman. The two were married in 1995, at Schwarzman’s Manhattan apartment, and the reception was held at the Frick Collection.

The severe decline in stock prices between March, 2000, and October, 2002, during which the S. & P. 500 dropped forty-nine per cent and the technology-heavy Nasdaq composite an astounding seventy-eight per cent, was devastating for the large financial companies, pension funds, and nonprofit institutions that depended on equity gains to finance their operations and to fund their obligations to retirees. The traditional investment mix of equities and bonds had served them well during the nineteen-nineties; now they found their asset values and endowments shrinking and, with them, the spending power that balanced operating budgets. Suddenly, the most desirable investments among institutions were those which, like hedge funds, private-equity, natural resources, and emerging-market funds, don’t necessarily track the stock market—so-called non-correlated assets.

Blackstone, too, struggled during the recession of 2001 and the collapse of the technology bubble, but not to the same extent as venture-capital firms and technology investors. As new money fled the stock market and poured into the firm, Schwarzman’s management style evolved, but only incrementally. Partners recall that, for all the firm’s success, Schwarzman acted as though they were only a deal away from failure. One person recalls a voice mail containing harsh criticism of a troubled deal that followed moments after the “Happy Birthday” call. A Blackstone investor recalls a golf outing with Blackstone partners where the game ended abruptly after the fifteenth hole, because Schwarzman expected his partners to be on time for the cocktail party. “It was ridiculous,” this investor says. “When he says jump, they jump. Still, I have to say they’re very disciplined in their business.”

Early on, Peterson agreed that the firm should have only one chief executive, and readily deferred to Schwarzman, a stickler for detail who chose the firm’s wallpaper and furnishings and interviewed every prospective employee. But, as the firm grew, Schwarzman came under pressure to delegate some management responsibilities and to carve out bigger equity stakes for both existing partners and new executives. Among those arguing for a change in course was Peterson, whose partnership with Schwarzman, perhaps inevitably, was increasingly strained. Although Schwarzman and Peterson had initially had equal equity stakes in the firm, over the years, as equity was awarded to other partners, those grants had come disproportionally from Peterson’s holdings. Peterson agreed that Schwarzman’s role merited a larger stake; indeed, he’d told Schwarzman that he wanted to spend less time at the firm and, in return, was willing to relinquish some of his equity. Still, the negotiations were painful. At one point, Peterson said that he would not give up any more, and he insisted on an agreement in writing. By the eve of the public offering, Schwarzman owned almost thirty per cent of the firm; Peterson’s interest had shrunk to eleven per cent.

Schwarzman and Peterson had different approaches to risk. Peterson was inherently more cautious, and Schwarzman found that every time Blackstone ventured into a new line of business he had to persuade Peterson to go along.

One banker who knows both men well explains, “At this point, there’s tremendous animosity between Steve and Pete. Steve gets the credit, but it was Pete’s Rolodex that built that firm. Pete gave and gave equity to accommodate more people, but Steve never gave. Pete may not be perfect. He encumbered the process. Steve did deserve the greater participation. But Steve never understood the importance of Pete’s broad-gauge nature.” A friend of Schwarzman’s put it this way: “The son eclipsed the father. Neither feels he’s gotten sufficient respect from the other.”

These tensions need to be kept in perspective: the Schwarzman-Peterson partnership, which has survived twenty-three years, is one of the most successful and enduring in Wall Street history. While conceding that there were some issues over equity shares, Schwarzman told me, “I have enormous respect for Pete, and we have a seamless relationship. Ours is the longest adult relationship in my life. We’ve never disagreed on any major issue. We do come at life from different points of view. He’s eighty-one—a different generation. He’s a good strategist and planner, a great thinker. We end up reaching the same conclusions.”

Schwarzman recognized that if he was to remain immersed in deals and larger strategic initiatives Blackstone needed a manager. In early 2002, he approached Hamilton (Tony) E. James, the tall, cerebral, patrician head of the investment-banking arm of Donaldson, Lufkin & Jenrette, which had recently been acquired by Credit Suisse First Boston. Already wealthy from the Credit Suisse First Boston deal, James, who had run his own operations for fifteen years, was planning to pursue personal interests, after helping with the merger. But Schwarzman courted him over a series of dinners at his apartment, and every meeting, James told me, “was more intriguing.” Schwarzman argued that Blackstone was outgrowing its entrepreneurial phase and needed more professional management. James had been deeply involved in all of Blackstone’s lines of business while he was at Donaldson. “People say Steve is a tough boss,” James said. “I don’t mind this; I’m happy to be accountable. Just give me the scope to run the business. He convinced me that I’d be empowered. If others didn’t like it, he’d support me one hundred per cent.”

James arrived in the summer of 2002, the stock market’s nadir. He streamlined operations, brought in new partners, imposed new screening standards for potential deals, and expanded committee oversight, so that deals weren’t based on one person’s judgment. He completed an internal evaluation called “Respect at Work,” aimed at boosting morale and coöperation. He worked to soften Blackstone’s aggressive image with clients and other dealmakers. “I didn’t want to be the most difficult partner—I wanted to get the first call,” he says. In contrast to Schwarzman, James worked toward consensus. “You can’t dictate,” he says. “I was more a guide than a leader.” To the surprise of many, Schwarzman delegated broad authority to James to run the firm.

Peterson gives James much of the credit for the firm’s recent success. “At my age, I can afford to be objective,” he told me. “Steve deserves credit. He’s aggressive, focussed, and growth-oriented. But Tony James is a remarkable manager. People love working for him. If you ask the top people why they’re here, they’ll tell you it’s because of Tony James.”

Blackstone’s alternative-asset businesses were not alone in benefitting from the extremely low interest rates and lax lending standards of the post-September 11th and post-Internet-bubble economy. Residential-real-estate values, which also benefit from high leverage, surged as well, becoming what is now widely conceded to be a bubble that rivalled or surpassed the Internet frenzy in magnitude. Not only were there billions of dollars in home refinancings as Americans drew cash from the rising value of their real estate; subprime lending—to borrowers who had bad credit records or who didn’t document their incomes, assets, or jobs—had soared in recent years. This huge expansion in risky loans was made possible by Wall Street banks such as Citigroup and Merrill Lynch, which bundled the loans together and parcelled out the resulting “collateralized debt obligations”—C.D.O.s—to investors eager for higher returns in a low-interest-rate environment. The theory was that any one of these loans was at high risk of default, but a large and diversified portfolio in which only a small percentage of loans defaulted was so safe that it merited an AAA rating from the credit agencies. Though these loans were hugely profitable for the banks that packaged and marketed them, Blackstone wasn’t tempted. Jonathan Gray, the co-head of Blackstone’s real-estate group, explains that subprime mortgages and related securities weren’t Blackstone’s area of expertise. “We invest in what we know and understand,” he said, noting that the firm has less than one per cent in residential real estate. Schwarzman tries to avoid business meetings when he’s in the Hamptons, but in June, 2006, Michael Klein, the chairman and co-chief executive of markets and banking at Citigroup, came over for lunch. Schwarzman and Klein tried to meet at least once a year outside the office to brainstorm, but this year’s discussion had taken on added urgency as stock markets soared and private equity reaped ever larger gains. Klein unveiled a detailed plan for taking the Blackstone Group public, in an initial public offering that, he argued, would value the company at an astounding $30 billion. This wasn’t the first time someone had broached the idea of going public—Goldman Sachs had been raising the issue for some time, especially after its own successful offering, in 1999. Schwarzman, who had taken so many companies public, had often pondered the possibility. Still, at that point no private-equity or other alternative-asset managers had taken their firms public. It was one thing for full-service investment banks like Goldman Sachs and Morgan Stanley to be publicly owned; they were closer to commercial banks than to private partnerships, and much of their income was fee-driven. But private-equity firms like Blackstone had long argued that their financial interests and incentives were identical to those of their investors: Blackstone partners, by investing in the same partnerships and having a carried interest, prospered when their clients did. If Blackstone was a public company, it would need to consider its shareholders’ interests along with those of its investors.

A public offering would also expose aspects of Blackstone’s business that even close observers could only guess at, such as its ownership structure, its partners’ equity shares, its compensation, and, most important, the exorbitant profits that Blackstone was earning, and, by extrapolation, the exorbitant profits of other private-equity and alternative-asset-management firms. At a time of growing discrepancies in income between the poor and the rich, how would the public react to these revelations? It also seemed peculiar that a private-equity firm, which championed the virtues of private ownership, would elect to go public.

Still, Michael Klein convinced Schwarzman that Blackstone could retain many of the benefits of private ownership, and that it would be able to align the interests of management and investors. Investors would continue to invest, Schwarzman felt, as long as Blackstone delivered superior results. Public ownership would generate capital for investment and expansion and a currency—common stock—that could be used for acquisitions. “Michael wasn’t the first to propose this, but he was the first who really understood the earnings power and the growth potential,” Schwarzman says. “I told him the only problem was that his valuation was too low.”

Peterson told me that he also discussed these issues at length with Schwarzman, including the fact that Schwarzman needed to be discreet about his own wealth. “I could have blocked this, but I didn’t,” he said. “Still, I told him, you’re going to be the focus of intense scrutiny. You’ll be the first. You’d better be prepared.”

As secret preparations went forward, at one point involving as many as a hundred and fifty auditors poring over Blackstone’s records, the buyout boom moved into high gear, with a record sixteen hundred announced deals in the first half of 2007 alone. Stock markets rose as many stocks were valued to include the premiums that a private-equity firm could be expected to pay. Banks competed aggressively to lend, and the spread between junk bonds and U.S. Treasuries—historically, a measure of investors’ tolerance for risk—reached an all-time low. In this potentially lucrative buyout environment, Blackstone began to hold back. “We were cautious in the so-called golden age,” Schwarzman says. “We were the least aggressive of all the big firms in the first half of 2007. We were very concerned about the high prices of deals and the vast amount of liquidity fuelling the boom—we had articulated this at an investor conference in May, 2006. Things always come to an end, and when they do they end badly. We only did two large deals—Hilton Hotels and Equity Office Properties.”

Despite Peterson’s advice to avoid personal publicity, Schwarzman began planning the party for his sixtieth birthday, which fell on February 14, 2007. Weeks before the event, the Times ran an article, by Landon Thomas, previewing the plans and speculating about the guest list: “MORE RUMORS ABOUT HIS PARTY THAN HIS DEALS.” The article also mentioned Schwarzman’s tradition of extravagant Christmas parties, including the most recent, which had had a James Bond theme, and featured models circulating dressed as “Bond girls,” with Schwarzman in a tuxedo. “Steve does not like little things, whether it’s deals, Christmas parties, or his own homes,” the investor Roland Betts, who is a member of the Yale Corporation, told the Times.

Schwarzman and his press spokesman tried to discourage the story, without success, and it came out just as the huge Equity Office Properties deal reached its climax. In the event, the scale of the party disappointed no one. Part of the cavernous Park Avenue armory was transformed into a large-scale replica of the Schwarzmans’ Manhattan apartment by Philip Baloun, the party planner who designed the Prince Charles gala at Lincoln Center. Replicas of Schwarzman’s art collection were mounted on the walls, including, at the entrance, a full-length portrait of him by Andrew Festing, the president of the Royal Society of Portrait Painters. Dinner was served in a faux night-club setting, with orchids and palm trees. Guests dined on lobster, filet mignon, and baked Alaska, and were offered an array of expensive wines. (Schwarzman himself doesn’t drink.)

The comedian Martin Short was the m.c.; he poked fun at his short, rich host. The composer-pianist Marvin Hamlisch played a number from “A Chorus Line.” Patti LaBelle sang a song written for Schwarzman, and Rod Stewart sang a medley of his hits, for a reported fee of a million dollars.

Fortune put Schwarzman on the cover of its March 5th issue, proclaiming him “Wall Street’s Man of the Moment: with a history-making deal and headline-making birthday party, Steve Schwarzman has become the symbol of a new era in finance. And that’s always a risky proposition.”

This kind of attention was exactly what Peterson had feared. “I’m a son of Greek immigrants,” Peterson told me. “For years, I’d shop at sales to save twenty-five per cent and take the shuttle to Washington to save money. I waited twenty-seven years to buy the apartment I wanted. Steve made fun of me, said it was irrational. Maybe he’s right. Steve is a different generation. They were brought up differently. They like to consume. They’re boomers. They want it all and they want it now. To hell with the future!”

On March 22nd, Blackstone filed a preliminary prospectus for an initial public offering, revealing that it had more than $78 billion in assets under management and listing its high returns. Two months later, an updated filing disclosed the existence of an investment by a sovereign wealth fund, the State Investment Company of China; it agreed to pay $3 billion for a non-voting stake of just under ten per cent. The Chinese investment—the first equity stake ever taken by the fund—immediately valued Blackstone at more than $32 billion.

On June 12th, Blackstone added the details that everyone on Wall Street had been waiting for: how much Schwarzman would make in the deal and how much of the firm he and Peterson owned. The prospectus disclosed that Schwarzman would take out $677.2 million from the offering and would retain a twenty-four-per-cent ownership stake, valued at nearly $8 billion, at the expected thirty-dollar-a-share offering price. Peterson would withdraw $1.9 billion, to be placed in a charitable trust, and would retain just a four-per-cent stake, valued at $1.3 billion. Tony James would withdraw $188.5 million and retain a 4.9-per-cent stake, valued at more than $1.6 billion.

“You have no idea what an impression this made on Wall Street,” a friend of Schwarzman’s who works at another bank says. “You have all these guys who have spent their entire lives working just as hard to make twenty million. Sure, that’s a lot of money, but then Schwarzman turns around and, seemingly overnight, has eight billion.”

Two days later, the Wall Street Journal ran a front-page story, by Monica Langley and Henny Sender, that recapped the now notorious birthday party, and quoted Schwarzman’s Palm Beach chef, who said that Schwarzman dined on four-hundred-dollar stone crabs and complained about an employee’s shoes because he found the squeak of their rubber soles distracting. The article quoted Schwarzman saying that his business philosophy is “I want war—not a series of skirmishes” and “I always think of what will kill off the other bidder.”

Schwarzman was wounded by the Journal article, which, he noted defensively, didn’t mention that he had sent the chef’s daughter to summer schools at Harvard and Yale and kept the chef on his payroll while he was undergoing treatments for cancer.

The combination of self-indulgence, seeming disregard for those less privileged, and militant hostility toward rivals inflamed many on Wall Street who were already envious of Schwarzman’s record and the additional fortune that he was about to gain.

The day after the Journal story appeared, Senators Max Baucus and Chuck Grassley proposed legislation that would subject private-equity partnerships like Blackstone, whose earnings had been taxed at the lower rate of “passive income,” to ordinary corporate income taxes. In the House, Charles Rangel proposed that carried interest be taxed at the ordinary income rate rather than at the lower capital-gains rate. The measure would effectively increase Blackstone’s tax rate from fifteen per cent to thirty-five per cent, seriously eroding its profitability, and, according to the Joint Committee on Taxation, would generate an extra twenty-six billion dollars over the next ten years.

On June 22nd, the opening day of trading, Blackstone shares reached a high of thirty-eight dollars. On a day that should have been the pinnacle of Schwarzman’s career, with an achievement likely to earn him a place among such figures of finance as J. P. Morgan and Andrew Carnegie, Schwarzman stayed away from the Stock Exchange and didn’t ring the traditional closing bell, apprehensive about further unflattering publicity. He had no plans for that night. His wife was on a long-scheduled African safari. He worked until after 8 P.M., then returned to his apartment and had dinner in the library, in front of the TV. He wanted to escape, perhaps with an episode of “CSI.” He clicked on the remote, and stumbled onto a live panel discussion on CNBC about him and the Blackstone offering.

“I stared at this in complete amazement,” Schwarzman said. “All I wanted was a normal private moment in front of the TV. I thought it was all over.” He sat for about ten minutes before turning the TV off, feeling odd and alone.

Within weeks of Blackstone’s offering, Wall Street was shaken by rising defaults in subprime mortgages, which exposed the inherent risk in all those supposedly safe, diversified C.D.O.s. Losses appeared throughout the global financial system, surfacing in everything from foreign banks to American pension funds, and even a few very safe money-market funds.

Although Blackstone avoided the mortgage and credit debacles that are expected to lead to more than two hundred and sixty billion dollars in losses, the resulting credit freeze caused asset values to plunge, credit to disappear, and leverage to decline, all of which affected Blackstone’s core businesses. Its earnings for its first two quarters as a public company disappointed investors, and its stock went down. Early last month, Blackstone couldn’t raise the financing for the buyout of the mortgage unit of PHH Corporation, which it had agreed to buy in 2007, and the deal collapsed. At the end of the month, Blackstone’s proposed buyout of Alliance Data Systems, for $6.8 billion, also collapsed, and A.D.S. is suing Blackstone to force it to complete the deal. The “bad ending” that Schwarzman predicted in 2006 seemed to be at hand.

“I’ve lived through periods of illiquidity before,” he said. “Asset prices come down. The economy slows or even goes into recession. Then the cycle re-starts. We buy at lower prices with less leverage. There are great opportunities for high returns—much better than the so-called golden age we’ve just come through. From our perspective, we see greater opportunities going ahead.”

When I was talking with Schwarzman in his office, I asked him how it felt to be the focus of so much negative attention.

He paused, and his look hardened.

“How does it feel? Unattractive. No thinking person wants to be reduced to a caricature.” He continued, “Why did this happen? We went public in June, 2007, at the top of a giant bull market, with a society undergoing rapid change. Globalization. Job dislocation. Middle-class anxiety. Private equity is seen as a symbol of the people who are prospering from a world in flux. That’s a lightning-rod situation.”

He said that “plenty of people” had tried to advise him on how extremely rich people are expected to behave—the charitable activities, the good works, the donations. “But you know what?” he said. “I don’t feel like a wealthy person. Other people think of me as a wealthy person, but I don’t. I feel the same as when I was a fifth-year associate trying to make partner at Lehman Brothers. I haven’t changed. I still think of Blackstone as a small firm. We have to prove ourselves in every deal. Every piece of paper is important. I’m always still trying.”

Schwarzman told me that in 1993, at forty-six, he was found to have a rare blood-protein deficiency that put him at risk of a blood clot or embolism, a condition that had killed his grandfather at the same age. He is tested every few weeks and takes a pill each day, which he says should help guarantee him a normal life span. Still, “it’s a reminder that life is fleeting,” he said. “Every day should be a good day. People fool themselves that they’ll be here forever. I get a daily wake-up call that that’s not true. We have limited time, and we have to maximize it. Live life intensely—I’ve always believed in that. I’m happy to be here. I was happy to make it to sixty. That’s the simple reason for the birthday party.” ♦